Property Investors Widen Hunt in Europe

Buyers Are Turning to Secondary Cities and Various Asset Types

By

Sarah Krouse

Sept. 17, 2013 4:32 p.m. ET

Institutional investors in Western European property are getting bolder in their hunt for higher returns, testing new locations and asset classes.

Investors have been buying property in secondary cities and seeking prime real estate in the best locations in economically struggling European countries that, a year ago, were left to the most adventurous.

The volume of European commercial property deals in the first half of the year reached €66.3 billion ($88.4 billion), making it the strongest first half since 2008, according to property advisory firm Cushman & Wakefield. The consultancy said this was, in part, because investors have broadened their criteria.

Axa Real Estate acquired this Barcelona building and others over the summer.
Axa Real Estate

For example, at the end of August, Legal & General Property acquired a portfolio of nine car showrooms in the U.K. on behalf of its UK Property Trust, which were yielding 6.33% at the time of the deal. The £40 million ($63.6 million) deal was the U.K. fund manager's largest in the sector to date. It owns four other car showrooms in the U.K.

Legal & General Property also completed several deals in the student-housing sector this year and is looking for investments in the health-care sector. Parent company
Legal & General Group
PLC moved into house-building for the first time with its March acquisition of a 46.5% stake in CALA Group.

Simon Marrison,
European chief executive officer at LaSalle Investment Management, says regional retail in the U.K. has become increasingly attractive to his firm.

"It's not glamorous retail; it's necessity retail, where you have a poorer catchment [area]—one that doesn't necessarily have a computer at home, so you're not competing with online retail and a group that doesn't have a lot to do during the day," he says.

The volume of European retail-sector property deals rose more than 30% year-on-year to €16 billion in the first half of the year, according to Cushman & Wakefield.

"There's definitely a trend where [investors] are going up the risk curve in terms of the type of assets or going into more regional cities," says
Stefan Wundrak,
director of property research at Henderson Global Investors Ltd.

Among the secondary cities that have seen an increase in the value of deals completed in the first half of this year, compared with the same period in 2012, are Hamburg and Hanover in Germany; Lyon and Nice in France; and Leeds, Milton Keynes and Liverpool in the U.K., according to data from Cushman & Wakefield and Real Capital Analytics.

Investors point to the higher yields available for assets in those markets. Higher yields can represent a perception of greater risk.

For example, the average yield on prime offices in smaller U.K. cities is about 6.25% compared with 4% in London, according to estimates from consultancy Jones Lang LaSalle.

In France, prime office yields in Lyon are 5.65%, compared with 4.5% in Paris, a more crowded market.

Deutsche Asset & Wealth Management said in a note to clients this month: "We stress at this juncture that the window for taking advantage of secondary locations in North-Western Europe will not remain open indefinitely."

Rob Martin,
director of research at Legal & General Property, said that since the beginning of 2010, 70% of the firm's purchases have been outside London. But he warned that investors need to be selective when dealing in markets with which they aren't familiar.

And not all regional markets are created equal. Some are home to aging properties or don't have the demographics to sustain a recovery that will support property market growth.

"Where I would be hesitant—and this is a strategy some will go for—is buying effectively tertiary stock [assets in very remote locations] on the expectation that yields across the whole market will compress," Mr. Martin says. "Even in a recovering economy, I think there are some spaces that will become obsolete and that will still be painful to have," such as older shopping centers in areas where there are newer and more desirable counterparts for people to visit.

The real-estate investment units of two large insurers ventured back into Spain and Italy this year, in a sign that large fund managers are becoming more comfortable shopping for deals there.

Axa Real Estate bought a portfolio of 13 buildings in Barcelona from the Catalan government for €172 million in June, marking its first Spanish deal since 2008. It also bought two office buildings in Milan that month. Allianz Real Estate invested in two office buildings, one in Milan and one in Rome, during the summer.

Prime office yields in Milan are 5.1% in Milan and 5.3% in Rome, according to Jones Lang LaSalle, while prime office yields are 6.75% in Barcelona and 6.2% in Madrid.

Deutsche Asset & Wealth Management said in the research note that it had added investments in "prime Eurozone periphery markets" to its recommendations for the coming year, adding that investors prepared to take on additional risk should begin plotting their return to the strongest markets in Italy and Spain by 2015. The firm tipped Italian retail to outperform its Spanish counterpart, but highlighted Madrid's office market as one it expected to outperform relative to others in Europe's more fiscally troubled areas.

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